Following the Chancellor's Spring Statement speech yesterday (23 March) Head of Tax, John Endacott provided his insights into the key issues: What the Spring Statement tells…
Much of the government’s core announcements at the 2021 Budget today were around corporation tax – but there was very definitively an air of familiarity about much of this…. Great Scott!
Corporation Tax Increases
The rate of corporation tax will remain at 19% until 1 April 2023. From that date onwards the main rate of corporation tax will be 25% – however, there will be something of a return to the old system with three levels of corporation tax rate – small company rate, marginal rate and main rate.
The government is therefore introducing a small profits rate of 19% for financial year April 2023. The small profits rate will apply to profits of £50,000 or less. Companies with profits between £50,000 and £250,000 will be taxed at the main rate of 25% but will be able to claim marginal relief. These thresholds are proportionately reduced for the number of associated companies and for short accounting periods.
Note that reference is made to associated companies. The old corporation tax system previously operated on associated companies which is a broader test than the current ‘group company’ test we’ve become used to. It now appears that we are returning to the corporation tax system as it was a decade ago – which has its frustrations.
In the early part of my career I spent copious amounts of time working out group recharges and management bonuses – all to ensure that we stayed out of the marginal rate profit bracket (because bizarrely the marginal rate of tax was higher in there than anywhere else). It was commonly also a major exercise to calculate the number of associated companies that were present. Are we to return to those ‘glory’ days of very painful corporation tax compliance?
Loss Carry Back
The government has also temporarily extended the period over which businesses (including companies) may carry-back trading losses from one year to three years, with cap of £2,000,000 cap. As many people will remember the carry back loss provisions were extended in a similar (albeit not identical) fashion in the global economic downturn in 2009.
The £2,000,000 cap applies separately to unused trading losses made by companies, after carry-back to the preceding year, in relevant accounting periods ending between 1 April 2020 and 31 March 2021 and a separate maximum of £2,000,000 for periods ending between 1 April 2021 and 31 March 2022.
The £2,000,000 cap will also be subject to a group-level limit, requiring groups with companies that have capacity to carry back losses in excess of £2,000,000 to apportion the cap between its companies. Further detail on the group limit will be published in due course.
Together with the 2017 changes to interest deductibility, and the changes to loss carry forwards, group relief, and the £5m limit, this will probably make for an ever increasingly difficult and complex picture for groups with losses to deal with.
As announced at Budget, between 1 April 2021 and 31 March 2023, companies investing in qualifying new plant and machinery will benefit from new first-year capital allowances. Under this measure, investments in main-rate assets will be relieved by a 30% ‘super deduction’ (in addition to the 100% incurred), whilst investments in assets qualifying for special rate relief will benefit from a 50% first-year allowance. Interestingly, it seems only companies will obtain the benefit of the P&M super deduction.
The introduction of the super deduction is in addition to the extension of the temporary £1,000,000 limit for the annual investment allowance (AIA). This change will have effect from 1 January 2021 to 31 December 2021.
More time will be required to consider how the AIA and super deduction will interact with one another – and other areas of the capital allowances legislation.
The message appears to be that businesses will largely be left alone until 1 April 2023 – and then those with profits above £250k per annum will be asked to contribute up to 6% more in corporate income tax terms than they were before.
I suspect many people will be pleased that we’ve been given notice, and that there are no other provisions being put forwards around close company surcharges for undistributed profit, which there has been some quite legitimate concern about.
In the interim there are some measures in place designed to reward investment, mainly via plant & machinery related super deductions, whilst those businesses whop continue to struggle and incur losses will have a greater ability to achieve a more flexible loss offset.
Now where are the keys to my DeLorean……….? Nobody calls me chicken.